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Choosing Risk Over Dividends

Posted By Barry Ritholtz On April 18, 2006 @ 8:58 am In Investing,Markets,Psychology | Comments Disabled

One last piece of not-so-anecdotal evidence:  We have previously mentioned the relative outperformance of low quality stocks [1]. What happens if we divide the perceived higher quality stocks (i.e., SPX) into dividend payers versus non-dividend payers?

In Q1, 2006, share prices for the 113 companies in the Standard & Poor’s 500-stock index that don’t provide dividends rose 8.58%.

And for the 387 that do? The quarterly gains were 5.45% — some 36% lower.

The WSJ [2] adds:

"The figures indicate that, despite concerns like rising interest rates, slowing profit growth and high oil prices, investors are still bullish about the stock market and willing to accept greater potential volatility — rather than sticking with the tried-and-true dividend-paying shares — in the belief they will receive higher returns, analysts say."

That sanguinity in the face of significant concerns may be a sign of complacency.

Over the past few months, I have gotten into a debate with a variety of people — Rev Shark, Cody, Jim Cramer — as to whether or not there is anecdotal evidence of too much bullishness or bearishness. The example above copuld be interpreted as a sign of technology leadership, i.e., tech stocks typically don’t pay dividends.

The conclusion is that those with a bullish bend see too much bearishness, and those with a bearish perspective see too much bullishness.  That’s the nature of anecdotal evidence versus actual data points.

As mentioned last week [3], its a battle between two crowds: the “Wall
of Worry,”
and the “What, Me Worry?” [4]


Stock Investors Choose Risk Over Dividends [2]
WSJ, April 15, 2006; Page B3

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/04/choosing-risk-over-dividends/

URLs in this post:

[1] relative outperformance of low quality stocks: http://bigpicture.typepad.com/comments/2006/03/relative_outper.html

[2] WSJ: http://online.wsj.com/article/SB114504798492326381.html

[3] last week: http://bigpicture.typepad.com/comments/2006/04/then_now.html

[4] “What, Me Worry?”: http://en.wikipedia.org/wiki/Alfred_E._Neuman

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